Exxon’s Dangerous Energy Vision

“Forecasts are not always wrong; more often than not, they can be reasonably accurate. And that is what makes them so dangerous… They often work because the world does not always change. But sooner or later forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete.” Pierre Wack, leader of Shell’s initial Scenario Team, 1971

But Exxon’s energy output cannot grow if it only offers more (expensive) thermal fuels to fill fully built-out existing pipelines and energy channels. Too many alternative technologies are now competitive to allow the current energy system to survive peacefully into old age.

That is why Exxon’s rigid backward-looking vision is so dangerous – mainly to itself, and its investors.

——————————

The Incumbent’s Curse: Trying to Define Reality, rather than Understand It

In a recent report, Forecasting Failure, published by Oil Change International, they suggest that oil companies use annual forecasts not as objective analysis, but as advocacy for their business model.

Of course, glossy corporate brochures may be the last place you would assume to find uncomfortable issues debated. But as the report points out, if advocacy truly is their objective, then there is a more troubling angle:

“Oil company forecasts not only describe the future, they influence it…They can create a fatalism that fossil fuels will necessarily dominate the energy mix for decades to come.”

The report points out a number of the ways in which industry forecasts may be generating a preferred image of the future, rather than coolly predicting it:

• A bias toward single favoured scenarios – little or no stress-testing of the main model
• A systemic bias against alternative energy growth forecasts
• False confidence about the future, glossing over negative trends

In conclusion, the report believes that most oil company forecasts today have lost their previous broad range and challenge, in favour of a “closed forecasting approach”.

They attribute this to advocacy, but it may also be a sign of an industry under stress, and an indication that the incumbents are, perhaps wilfully, misreading the nature of energy competition they are facing.

Exxon’s Lone Scenario
The most extreme version of forecasting the future is Exxon’s Outlook for Energy, summarised in their Energy & Carbon Summary. It has a lone scenario, and uses a single set of numbers to project supply and demand over the next quarter century.

In sum, it sees little changing.

Energy demand grows 25% over the next 25 years, but oil and gas still dominate, coal remains rock steady, nuclear and hydro are sidelines, and solar / wind grow modestly.

An energy supply hierarchy stays in place.

Here is their vision:

What Exxon Gets Right
Exxon’s stoic belief in the dominance of thermal fuel energy has of course a long history to support it. Hydrocarbons have controlled most energy supply for over 100 years.

They are also right in looking at energy as energy. Not as coal, or hydro, or solar etc but as interchangeable forms of useful products such as power and heat.

They have therefore used, helpfully, a single chart representing all major supply technologies with a single unit of output – Quadrillion BTUs (Quads).

What Exxon Gets Wrong
But Exxon’s vision is a closed, anxious one. It tries too hard to put each energy source in a well-regulated box: not growing too fast, not growing too slow.

And it falls foul of the forecasting problems that the Oil Change report highlights – no stress-tests and persistently underestimating the growth of solar / wind.

Stress-Testing the Exxon Vision
Here is Exxon’s 2040 vision with only two changes on the downside to stress-test their assumptions.

source: Exxon, and dollarsperbbl for alternative scenario

First there is lower aggregate energy demand, perhaps due to quick EV growth or OECD energy-efficiency improvements: the stress-test scenario therefore uses 0.7%pa growth, rather than 0.9%.

A robust solar/wind growth scenario creates a very distinct future picture of world energy development: the rising dominance of alternative energy technologies and the decline of historic fossil fuels.

It’s not a world a major incumbent such as Exxon even wants to even speculate on, it seems.

A Systemic Bias against Solar / Wind Forecasts (and Shale?)
Exxon have chosen to use a strangely precise number for long-term wind/solar projections – 5.8%pa.

But, as the Oil Change report illustrates in detail, oil companies have systemically under-estimated solar / wind growth. They have almost certainly done so here again.

The pace of change also makes low estimates wrong very quickly.

Exxon’s latest projection begins in 2015, but solar / wind actual growth for 2016 is already known (growing at over 15%), and predictions out to only 2021 are likely to be fairly accurate as projects are already underway.

If we use actual 2016 data, and 12%pa growth for 2017-2021 (a likely estimate from current project announcements), this suggests energy output from solar / wind at roughly 10 quads or about 5 million b/d by end 2021 – a doubling from 2015.

Using Exxon’s 5.8% pa growth, solar / wind do not breach the 10 quad / 5 million b/d level until about 2028 – see chart. This is seven years later than using current data estimates.

The Rapid Rise of Scalable Energy
Exxon’s 25 year estimate may turn out to be correct – solar / wind, for whatever reason, may slump in growth after 2021 for example.

But a far likelier scenario is that Exxon will underestimate solar / wind growth (badly), and have to revise forecasts on an ongoing basis, as currently.

In a similar error in 2010, Exxon and other oil companies misread the impact of US shale oil growth, consistently underplaying its speed and size.

This is a bad incumbent mistake – it (yet again) allows competitors to develop without hindrance until they are too large or disruptive to ignore or react easily to.

Exxon and its peers are in danger of trying to dismiss a new high-growth competitor again – except this time it is a globally-produced energy capture technology, far less subject to short-term oil price moves.

The creation of 8 Quads pa of energy (about 4million b/d) from US shale in the space of just 5 years has upended the global oil market.

A similar pace and scale of wind/solar, with greater long-term growth potential, will most likely totally disorder the global energy market.

By end 2021, shale and wind/solar could be producing a combined 10 million b/d of energy, possibly far more, absorbing almost all of the incremental growth in energy that the world requires.

This is why, despite Exxon suggesting the world of energy supply will remain essentially static until 2040, they have already switched a large proportion of their future capital expenditure toward shale oil and gas.

Exxon’s Dangerous Vision
Exxon’s energy vision of 2040 will never come to exist: it is too fragile and built on too many preferred, just-so outcomes to ever emerge into reality.

It is a world that just reflects the past, relying mainly on the fact that previous 10 or 20-year projections have been reasonably successful.

As Pierre Wack noted – that is what makes it so dangerous. at a time of genuine transition and disruption.

Exxon is correct in placing all energy forms from coal to wind on the same chart.

But its vision is totally closed to rapid change.

Wind and solar (and to an extent shale) are all just energy, but nothing like the energy that Exxon produces.

The history of energy development over the past centuries is of no help in charting their rise. They are scalable, capture and conversion, global, energy technologies – different in kind, not degree, to diminishing, location-specific, extracted commodity thermal fuels
.
In this way wind and solar are also unlike hydro and nuclear: both of which require precise and limited geographic or technical capabilities.

Wind and solar will provide energy for the 21st century: electronic, technological, urban-efficient, dispersible, scalable and efficient – both in production (eg solar PV) and consumption (eg rooftop, EVs).

The chart here from Trusted Sources highlights how the new technologies, having passed the key threshold of industrial scale, continue on a growth curve far faster than the familiar 20th-century technologies .

Energy Production after reaching the 10mtoe pa threshold

Exxon and the incumbent industry’s denial of their impact likely increases the chances of such sustained growth.

21st Century Energy: New Options, New Channels, New Outlets, New Scale
Exxon’s vision assumes the immortality of the classic thermal-based energy system: analog, asset heavy, single-sized and producer-centric: near-zero growth, but broad-based and with high dependency.

But energy cannot advance if it only offers more (expensive) thermal fuels to fill the fully built-out existing pipelines and energy channels.

So if energy is to develop quickly in the 21st century, it will have to do this both on the back of existing infrastructure (electric grids, automobiles), and also offer a wide range of new innovations – dispersed, clean, high quality, electronic energy solutions at various scales, and via new outlets.

This is why Exxon’s vision is both fatalistic and dangerous – mainly to itself, and its investors.

It sets out a single, narrow conception of the energy world it believes it can hold on to via idealised forecasts – rather than dealing with the world’s changing energy options, and accepting the reality that new global energy technologies will provide them far more effectively.

By not engaging with the advances of 21st century energy, Exxon likely consigns itself to taking only a limited role within it.